Some ECB policymakers wanted more cautious tone on growth: sources

3 Min Read

FRANKFURT (Reuters) - A handful of European Central Bank policymakers urged President Mario Draghi to strike a more cautious tone on the economy in this week’s policy message but were ultimately won over, two sources told Reuters.

European Central Bank (ECB) President Mario Draghi attends the news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, September 13, 2018. REUTERS/Kai Pfaffenbach

The ECB cut its growth forecast for the euro zone at Thursday’s meeting but reaffirmed plans to continue withdrawing its monetary stimulus in the coming months, arguing that a benign picture at home offset turbulence in emerging economies.

It even repeated a reference to “broadly balanced” risks - central bank parlance for a situation where the odds on positive and negative surprises are roughly the same.

But a minority of participants at Thursday’s Governing Council meeting emphasized that debt markets were becoming more nervous and advocated taking a more pessimistic stance by saying risks were “tilted to the downside”, two sources familiar with the deliberations said.

Aside from swings in the Turkish lira and the Argentine peso, the ECB faces some worries closer to home as Italy has seen its borrowing costs rise since an anti-establishment government took power in June.

“Some were a little more cautious than others,” one of the sources said.

An ECB spokesman declined to comment.

Dissenters were in a minority and rate setters ultimately agreed on keeping the reference to “balanced” risks, in line with a recommendation by the ECB committee that compiled the economic forecasts. But Draghi also chose to emphasize that risks were on the rise.

“The risks surrounding the euro area growth outlook can still be assessed as broadly balanced,” he said in his opening remarks. “At the same time, risks relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently.”

The ECB is set to reduce the monthly pace of its bond-buying stimulus program to 15 billion euro ($17.48 billion) from October and expects to end new purchases in December, barring a worsening of the outlook.

The sources said that the end of the ECB’s 2.6 trillion euro program in December was now all but certain regardless of the formulation on the balance of risk and that it would take an extraordinary economic shock for quantitative easing (QE) to be extended into a fifth year.

The ECB plans to reinvest the cash it gets from maturing bonds for a long time after December but it hasn’t said whether the money will be redeployed in the same country and maturity.

While this had not been discussed at the meeting this week, another source said some policymakers were advocating not rolling over corporate bonds, spending instead the proceeds elsewhere.

At 3.3 billion euros, corporate bonds maturities account for just 2.5 percent of redemptions in the first eight months of 2019, according to the central bank’s own estimates.